Neil Hamilton

Political commentator, former Tory MP and now UKIP deputy chairman

We can't bank on Mark Carney to avoid carnage

SHORTLY after the 2008 financial crash, the Queen managed to flummox all the “experts” at the London School of Economics by asking them: “As it was so large, why did no one see it ­coming?” Cue much clearing of throats and shuffling of feet.

PUBLISHED: 00:00, Sun, Sep 1, 2013

Bank of England Governor Mark Carney

Then the LSE’s director of research, explained: “At every stage, someone was relying on somebody else and everyone thought they were doing the right thing.”

The “experts” were so hopeless at forecasting, we would have been better off ­asking Russell Grant or Mystic Meg. At least she gives you a 14 million-to-one chance of being right. The Bank of England never seems to be.

Former governor Mervyn King has just retired, loaded with honours and lucrative job offers. Talk about rewards for failure. He failed to predict the boom. Then he failed to anticipate the bust and landed us with calamitous debts for rescuing the failed casino banks.

King basked in the hubristic delusion of then Chancellor Gordon Brown that they had abolished “boom and bust”. King ordered that the base rate be raised only if headline inflation went substantially above two per cent.

This single-target mono-mania created the housing “bubble” as it made him ignore other signs of impending disaster, especially rising property prices, which did not feature in his inflation measure.

This official policy of benign neg- lect permitted the build-up of a £1.4trillion mountain of personal debt.

The banks took the hint from King’s loose monetary policy and lent like there was no tomorrow, with Northern Rock absurdly granting borrowers 125 per cent mortgages.

By 2008, banks’ total lending amounted to £6.2trillion, nearly five times the size of the entire economy. When the game of ­financial musical chairs inevitably stopped, nearly all major banks were bust.

At which point King started the Bank of England’s printing presses rolling to bail them out. In the process, the Bank acquired one-third of the entire national debt, which taxpayers will be paying for generations.T

he consequence of this so-called ­“quantitative easing” has been record low interest rates.

Great news for borrowers but very bad news for savers, pensioners and others on fixed incomes. Now King has gone, replaced by Canadian banking guru Mark Carney, can we breathe a sigh of ­relief? Not exactly.

Carney seems intent on treading the same path. A few weeks ago he announced that he will not raise base rate from its record low 0.5 per cent until unemployment falls below seven per cent, and he does not expect that until 2016 at least.

Yet there are some “green shoots” of recovery; the economy is expected to grow by one per cent in 2013, up from 0.4 per cent last year. Retailers have reported their best July since 2006 and there are even signs of life in the building industry.

Carney’s message of continued low interest rates was meant to reinforce this, encouraging firms to invest and consumers to spend on the back of recent growth.

The Government, up for re-election in 2015, is desperate for low interest rates to continue but will they?

Recent growth is due to Red Bull economics. King and Osborne’s £375million quantitative easing (aka money-printing) worked like a high-intensity caffeine shot.

It stopped the economy from collapsing but now comes the difficult bit. As the economy strengthens that tidal wave of artificial cash will seep more easily into higher prices than output.

It’s a case of Carney today but carnage tomorrow, in my view.

After several lean years, when suppliers have reached a certain level of sales, they will react to ­extra demand by trying to boost profits. If that happens and inflation rises, interest rates will have to rise too.

Because the financial markets believe this is a real threat Carney’s “forward guidance” speech, promising record low interest rates for another two to three years, failed to convince. He undermined, rather than reinforced confidence.

Market rates of interest on 10-year Government bonds immediately rose by 20 points.

That is because £100 lent today will be worth less when repaid in 10 years’ time, so lenders want more in interest in between.

If higher inflation is expected, interest rates rise to compensate. In inflation forecasts, I back the markets any day as the Bank’s record is hopeless.

Its two per cent inflation target has been missed for 45 months on the trot. The secret of inflation control is thinking ahead. The gap between monetary stimulus and increased prices is roughly two years.

When emerging from a ­recession, interest rates have to be raised to contain inflation before recovery is seen to be fully under way. That is a tough call, with production below capacity and many SDHppeople still jobless.

If interest rates on Government bonds continue to creep up, the Bank will have to extend quantitative easing and print more money.

Otherwise, having utterly failed to bring its vast borrowing under control, the Government’s interest burden will mushroom like Greece’s.

Interest on the national debt already costs £50billion a year; nearly half what we spend on the NHS. The debt itself is rising by £120billion a year.

It’s a case of Carney today but carnage tomorrow, in my view.

To paraphrase the Queen: “Why do the experts fail to see the blindingly obvious?” Answer: “Because there are none so blind as those who don’t want to see.”